LIMITING LIABILITY THROUGH PARTNERSHIPS
In todays commercial world overnight success is rare. Usually, entrepreneurs have worked long and hard to create a decent standard of living.
However, business is a risk and inevitably there will be failures. So that entrepreneurial initiative and wealth creation wasnt stifled by the possibility of losing everything, the concept of allowing limited liability was put forward as early as 19th Century.
Over the years as business practices have evolved, the law governing limited liability has developed and now a further significant change is being introduced - one which has gone largely unnoticed.
The Limited Liability Partnership Act 2000 - which received Royal Assent last July - creates a new form of business organisation which provides limited liability to its members. Subject to the passing of Regulations by Parliament, Limited Liability Partnerships (LLPs) can be formed from 6th April and they may, in certain areas of business, offer certain attractions as a vehicle for small businesses.
Limited liability is not free - the price being a requirement to register, make annual returns, and publish the businesss accounts. Limited liability is similarly under threat if it can be shown that the partners have traded whilst knowing (or what they ought to have known) that insolvent liquidation could not be avoided or if personal guarantees have been given to creditors (usually the banks and finance houses). This is no different from current restrictions affecting limited companies.
An LLP is a separate legal entity - meaning that the law regards it as being separate person from its members and it can enter contracts in its own name, own property and employ people.
It is created by registration at Companies House but there is no requirement to lodge a copy of the document regulating the relationship between its members (unlike a limited company which must register its articles of association). Changes in the members must be notified as they occur and annual audited accounts need to be filed.
In addition - and this, along with the tax status, is the most significant advantage over limited companies - there are no statutory requirements imposed over the management of LLPs. This means the concept of directors, company secretary, general meetings of members, share allotments and filing resolutions at Companies House all disappear. This must in itself represent a fair cost saving.
An LLP is tax transparent which means that although the law might regard it as a separate legal person, the Inland Revenue does not!
It is treated in exactly the same way as an existing Partnership and the partners pay income tax under Schedule D on profits and Capital Gains Tax on any gains made on the disposal of assets within the LLP.
Clearly LLPs may not necessarily be the best vehicle for everyone and the views of your tax advisers must be sought.
This legislation must be welcomed (along with the current review of the law relating to Companies) because it should make it easier for businesses to concentrate on creating profits and wealth. Small businesses, usually family owned, are the backbone of our economy and the removal of bureaucracy can only bring long-awaited benefits for them.
For more information about the issues raised in this article, or any other commercial law matter, please contact Martin Hall on 0115 912 666 or e0mail him on martinh@masser.co.uk.
